Purchase Applications: Purchase volume was unchanged WoW as the index held below the 170-level for a 12th consecutive week. Purchase Activity declined -6.2% QoQ as demand declined to its lowest level since 2q of 1995. On a year-over-year basis, purchase applications improved to -10.9% from -15.9% prior as we lapped the last hard compare of the year. From here, the YoY comps remain negative and get progressively easier through the balance of 2H.

Total Construction spending slowed -0.8% MoM in August with July revised down -60bps to +1.2%.

The first estimate for private residential construction showed spending slowed -0.1% MoM while decelerating on both a 1Y and 2Y basis. Expenditure growth slowed across each of Single-family, Multi-family and Home Improvement categories with the 4th consecutive month of (accelerating) negative growth in home improvement the most notable.

On the nonresidential side, construction spending on commercial, office and manufacturing structures remained strong in August although each slowed modestly sequentially. The nonresidential construction numbers extend the solid growth in private investment in structures reported in 2Q GDP and continue to accord with both the strong C&I/CRE loan growth figures in the Feds’ H8 data and the positive senior loan officer commentary.

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

Joshua Steiner, CFA

Christian B. Drake

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10/01/14 10:17 AM EDT

Join Tomorrow: Q4 2014 Macro Themes Conference Call at 1pm EDT

We will be hosting our highly-anticipated Quarterly Macro Themes conference call tomorrow, October 2nd at 1:00pm EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

Q4 2014 MACRO THEMES OVERVIEW:

#Quad4: Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

#EuropeSlowing: Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

#Bubbles: The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

CALL DETAILS

Toll Free Number:

Direct Dial Number:

Conference Code: 141367#

Materials: CLICK HERE (slides will download approximately one hour prior to the call)

"Adidas needs world-class designers, brand experts and technical whizz kids to improve its image against U.S. rival Nike, but persuading them to move to its headquarters in rural Germany is difficult. Adidas acknowledges it is hard to recruit at its headquarters near the Bavarian town of Herzogenaurach, particularly for design, marketing and digital roles, and admits it missed trends in the U.S. market, where Under Armour has just overtaken it as No. 2 behind Nike. Nike's better than expected earnings on Sept. 25 underscored its ascendancy."

Takeaway: Let's be clear about something, Adidas is not losing share because its headquarters is in a sleepy town. If anything we'd argue that its town is sleepy because the company is failing to drive the culture of the company. Nike is crushing it, and it's based in Beaverton, OR -- not exactly a cultural mecca. Yes, it's 20 min from Portland and a short drive to Seattle. But Adidas is a short drive from several major towns (as Adi CEO points out in this article), and it also has an office in Portland with 1,000 employees -- a good deal of them poached from Nike. Our point here is that Adidas' problem goes far beyond where people hang their hat. First it should look really close at its processes and ideals. Then it can worry about where the people that execute on them are physically located.

"Michael Phelps was arrested for driving under the influence in Baltimore, Maryland"

Takeaway: We hate to call out something like this, but the fact of the matter is that with the string of bad behavior in professional sports over the past month, this event will garner special attention. Nike dropped both Adrian Peterson and Ray Rice after their 'incidents', though we'd be surprised to see UnderArmour take much action against Michael Phelps. He'll make a public apology, and say he'll never do it again -- just like when he caught his first DUI at 19 in 2004, and when he was caught smoking pot in 2009. He'll get a fourth chance.

Mobile Commerce Callouts

This ranking of the top mobile commerce players is interesting to us on many levels. 1) Amazon and Apple combined equal the next eight companies on the list in total sales volume. 2) Apple and Google Play make sense as having a high conversion rate (high traffic and low ticket), but Amazon's 7% is extremely impressive -- especially for a company with an $82 average ticket. Average for the other retailers on the list is about 2%. 3) Sears is actually on the list of top 10, with an impressive 100% growth over last year. 4) Chinese mobile retailers have far superior ASPs than we have the US.

"With approval of the Supervisory Board, the Executive Board of adidas AG resolved today to return up to € 1.5 billion in total to adidas AG shareholders over the next three years, primarily in the form of share buybacks. In addition, adidas AG confirms its stated commitment to pay an annual dividend to shareholders in the range of 20% to 40% of net income attributable to shareholders."

"Executives expect that the $15 million acquisition of SM Mexico, which distributes and markets Steve Madden product in wholesale and retail stores, will boost efforts to grow the brand's presence throughout the Mexican market."

"Staples has kicked off a nationwide tour called "Refresh. Recharge. Refuel." The tour aims to encourage office workers across the country to take a break from the daily grind by visiting a large-scale, popup break room stocked with free snacks, coffee and other beverages."

"Staples Canada has closed 15 of its 331 stores in this country as the office supplies retailer feels the brunt of more business shifting online."

"The closings are part of a broader move by U.S. parent Staples Inc. to shut as much as 12 per cent of roughly 1,800 North American stores and downsize others as it struggles to improve its bottom line in a fast-changing market."

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10/01/14 09:02 AM EDT

LEISURE LETTER (10/01/2014)

Tickers: MPEL, PEB, RHP, CCL

EVENTS

Oct 1 - Oct 2: G2E Las Vegas

Wednesday: Oct 1

National Day of the People's Republic of China

DB Leveraged Finance: PENN, BYD, SGMS, MTN

TAG Fall Consumer Conf: LVS, WYN

Oct 8: HT Investor Day

COMPANY NEWS

MPEL – Casino resort City of Dreams, in Macau, announced on Tuesday a partnership with XCOR Space Expeditions that will see three customers sent to space. “The Space Legend” campaign will kick off in November. City of Dreams will draw one winner every month for three consecutive months. “Participating guests will become one of the first 12 XCOR astronauts in Asia and also one of the first 100 XCOR astronauts in the world,” XCOR Asia chief executive Alex Tang said in a statement.

Takeaway: Boldly going to the next frontier.

PEB – amended and supplemented its Trust Certificate, classifying and designating an additional 1,200,000 of the Company’s authorized preferred shares of beneficial interest, $0.01 par value per share, as 6.50% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest as the Company entered into an underwriting agreement with Wells Fargo Securities, LLC relating to the issuance and sale of 1,000,000 Series C Preferred Shares at a price of $24.50 per share. The closing of the offering occurred on September 30, 2014. Upon completion of the offering, there were 5,000,000 Series C Preferred Shares outstanding. The 1,000,000 Series C Preferred Shares issued and sold pursuant to the Underwriting Agreement have been registered on the Company’s shelf registration statement on Form S-3 which became effective upon filing with the Securities and Exchange Commission on March 4, 2014.

CCL – (Travel Weekly) Holland America Line said it was forced to cancel a seven-day Canada/New England cruise on the Veendam to make emergency repairs on a propeller. The cruise had been scheduled to depart Quebec on Sept. 28. Booked guests will receive a full refund of their cruise fare and all shore excursions booked through Holland America Line, plus a credit toward a future cruise equal to 100% of the fare paid.

CCL – (Courier Mail) In the latest debacle for Princess Cruises Sea Prince, close to 2,000 passengers in Sydney were told their New Zealand cruise had been cancelled due to technical issues. Over the past two months, The Sea Princess was plagued with several norovirus outbreaks as well as mechanical issues which resulted in passengers “go-slow” transit, meaning the ship could only travel at half-speed, resulting in several missed ports during a cruise to the north of Australia.

Takeaway: Lots of small cancelled sailing in aggregate may undermine the recent positive financial and earnings results. Hedgeye remains concerned with European pricing risk.

INDUSTRY NEWS

Macau Smoking Ban Pronouncement – We understand the DICJ called an urgent meeting with the six concessionaires with representatives from the Health Bureau. The DICJ issued a clarification that tables that are currently designated as “mass” tables can not be amended to be included as VIP/Premium/High Limit and shall maintain this designation and remain as non-smoking once the regulations are in force. Effectively all mass gaming areas as of Oct 6th will be non-smoking areas. This includes all tables within currently designated Premium and High Limit areas. Tables designated as VIP (Junket) tables within designated VIP (Junket) areas remain unaffected and smoking will be allowed. The definition of a “mass” table as opposed to a “VIP” table is via the classification from the DICJ whereby the annual operating premium payable to the Govt. associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K. All the current partition works and barriers regardless of height are now, based on the revised interpretation, obsolete. The only areas that smoking will be allowed on the mass floors is within the dedicated smoking rooms.

Takeaway: More restrictive than previously thought and a negative for the Macau stocks.

Macau Smoking Ban Part 2 – Only 12 of Macau’s casinos and slot-machine parlors have already completed the construction of smoking lounges on their mass floors, Health Bureau director Lei Chin Ion said on Wednesday. The Health Bureau on Tuesday said that by then only 28 gaming venues had submitted final requests to establish smoking lounges. Macau has 35 casinos in operation and five slot-machine parlors, according to data from the city’s Gaming Inspection and Coordination Bureau. Casinos will have to go 100 percent smoke-free in their mass floors after October 6 if their smoking lounges have not been inspected and approved by then. The full ban would remain until the smoking lounges are approved and operational.

Takeaway: Failure to comply with the smoking ban rules may create incremental disruptions in gaming play and downside to financial results.

Japan Gaming Legislation – (Bloomberg) A Japanese lawmaker backing the legislation to enable the legalization of casinos said he expects it to win lower-house approval next month and that the gambling resorts would be in major cities and charge locals an entry fee. “We want to finish up in the lower house in the first half of October and send it on to the upper house,” Koichi Hagiuda, secretary-general of a lawmaker’s group promoting the casino bill and an aide to Prime Minister Shinzo Abe, said in an interview. The parliament’s autumn session runs from September 29 to November 30. Should the bill to legalize casinos pass, further legislation setting rules for operating gambling resorts would have to be approved before building would start. This could be presented in the next session of parliament, starting in January, Hagiuda said.

Takeaway: Like all things Japan, its the process...so let's pass the enabling legislation.

Macau Ferry Fares to Increase – (Macau Daily Times) The Marine and Water Bureau (DSAMA) announced that it has approved requests from two local ferry service providers to increase their ferry fares for Macau–Hong Kong economy class journeys by 2.6 to 3.4% which equals MOP5. The economy class fare of the Hong Kong International Airport–Macau service will also rise between 3.3 and 6% which equals MOP8. The new fares will come into force on October 8. TurboJet and Cotai Water Jet asked to increase their fares between 7.5% and 8.3% in March this year.

Outbound Macau Visitation – (Macau Business Daily) Macau residents are traveling more and often. Since January, around one million locals vacationed abroad, a 7% increase year-over-year. South Korea is the hot new destination for locals, with Macau tourists growth of 10.2% year-over-year. By comparison and in sharp contrast to a 54.6% drop in outbound travel to Thailand and a 29.2% drop in travel to Malaysia during the same period, official figures released yesterday by the Statistics and Census Service. Mainland China remained the most popular destination, accounting for 72% of the total residents traveling outbound

Revel Update – The bankruptcy auction enters a third day today but with a contingency. According to local media reports which quoted Glenn Straub's attorney Stuart Moskovitz, rival bidder Brookfield Asset Management, which owns the Hard Rock casino in Las Vegas and Atlantis Paradise Island in the Bahamas, had increased its offer from $98 million to more than $110 million, but Brookfield made its bid contingent on it being accepted by 6 a.m. today.

Takeaway: Brookfield Asset Management, a late entry to the bidding process but already licensed in Nevada.

Singapore Housing –- The flash estimate of the 3rd quarter 2014 Resale Price Index (RPI) for public housing is 192.5, falling 1.6% over the prior quarter, the Housing and Development Board while the flash estimate of the private housing price index fell 1.3 points to 208, resulting in a 0.6% decline over the previous quarter, the Urban Redevelopment Authority

MACAU: NOT MUCH WIGGLE ROOM WITH SMOKING BAN

DICJ held a meeting with the concessionaires yesterday to clarify expectations for the smoking ban

CALL TO ACTION

The implementation of the October 6, 2014 Macau smoking ban became less hazy and very clear – with no room for operator interpretation of where punters can smoke on the gaming floor. The DICJ and Department of Health called an emergency meeting of the six Macau gaming concessionaires to discuss and clarify the smoking ban rules. We reiterate our negative outlook for the Macau gaming operators and believe the clarification will put added pressure on the concessionaires

DETAILS

At the same time some analysts are recommending investors attempt to catch the falling Macau knife, our outlook remains decidedly negative. Yesterday’s announcement by the Chinese government of the end of a specific anti-corruption program was interpreted as the pivot for a turn in the VIP business. However, we believe the broader anti-corruption effort continues and see no basing of Macau’s VIP business yet. Moreover, yesterday’s surprise convening of the concessionaires by the DICJ yielded much more specific guidelines for October 6th implementation of the smoking ban.

We understand the DICJ along with representatives from the Department of Health called a meeting with the six gaming concessionaires to discuss and clarify the smoking ban Tuesday afternoon. Apparently, the DICJ reiterated the only area where smoking will be permitted on mass gaming floor is within the dedicated smoking rooms. Aside from the dedicated smoking rooms with special ventilation systems, all mass gaming areas will be non-smoking areas, including premium mass areas.

The DICJ further noted the clear, legal definition and difference between a mass vs. VIP table -- the definition of a mass table as opposed to a VIP table is via the classification from the DICJ whereby the annual operating premium payable to the Macau government associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K.

The DICJ then pronounced -- tables currently designated as “mass” tables cannot be amended to be included as VIP/Premium/High Limit and shall maintain the mass designation and remain as non-smoking once the regulations are in force beginning October 6, 2014. Tables designated as VIP or junket sponsored tables within designated VIP areas or dedicated junket rooms remain unaffected and smoking will be allowed.

CONCLUSION

In our opinion, the clarification by the DICJ makes the smoking ban very black and white per the legal definition of what constitutes a mass vs VIP table. As a result, the gaming concessionaires cannot interpret where smoking is allowed or not allowed. We believe today’s ruling/clarification serves to further “dislocate” player time at the tables (some premium mass included), a vital component to driving play, and potentially cause further disruption as enclosed smoking areas specifically constructed for premium mass smoking may have to be dismantled.

We reiterate our negative view of the Macau gaming operators and would take advantage of yesterday’s pop to reduce positions. For longer-term investors desiring long exposure to Macau, we favor Galaxy Entertainment Group due to its early 2015 Phase 2 opening and unique Chinese VIP strategy which is taking market share from competitors. We will be in Macau on October 8th and 9th and will update our observations real time.

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